What is ‘Life Insurance’ Plan In India 2018

What is ‘Life Insurance’

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises a death benefit in consideration of the payment of premium by the insured.

How Life Insurance Works

Death benefit is the amount of money the insurance company guarantees to the beneficiaries identified in the policy upon the death of the insured. The insured will choose their desired death benefit amount based on estimated future needs of surviving heirs. The insurance company will determine whether there is an insurable interest and if the insured qualifies for the coverage based on the company’s underwriting requirements.

Premium payments are set using actuarially based statistics. The insurer will determine the cost of insurance (COI), or the amount required to cover mortality costs, administrative fees, and other policy maintenance fees. Other factors that influence the premium are the insured’s age, medical history, occupational hazards, and personal risk propensity. The insurer will remain obligated to pay the death benefit if premiums are submitted as required. With term policies, the premium amount includes the cost of insurance (COI). For permanent or universal policies, the premium amount consists of the COI and a cash value amount.

Cash value of permanent or universal life insurance is a component which serves two purposes. It is a savings account, which can be used by the policyholder, during the life of the insured, with cash accumulated on a tax-deferred basis. Some policies may have restrictions on withdrawals depending on the use of the money withdrawn. The second purpose of the cash value is to offset the rising cost or to provide insurance as the insured ages.

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Types of Life Insurance Policies Available in India

Insurance in India is monitored by the Insurance Regulatory and Development Authority of India (IRDAI). As of March 2016, the country had 54 insurers, with 24 of these offering life insurance products. These insurers offer a diverse range of products, which can be categorised into six broad types, namely.

Term Insurance Plans:

These are plans which provide life cover for a fixed period of time. They can be either long-term or short-term plans, with the term ranging from a minimum of 5 years to a maximum of 60 years (or more) in certain cases. The insured individual is protected during this term, with the insurance company paying his/her nominee the sum assured on his/her death during the policy term. No protection is provided if the insured dies after the term.

These can be considered as the simplest insurance plans available. While they are affordable, they might not be the ideal option, for there is no protection after the said period of time. These plans do not provide a maturity benefit in almost all cases. One should consider these plans if he/she foresees their demise within a specific period (though it would be close to impossible to predict the accuracy). This could be viewed as ‘temporary insurance’, and is also referred to as pure life plans by certain insurers.

Unit Linked Insurance Policies (ULIPs):

Individuals looking for protection plus returns can consider unit linked insurance plans. These policies are ‘linked’ to market products like mutual funds, bonds, stocks, etc. There is a certain amount of risk associated with ULIPs, with this risk falling on the policyholder.

Most insurers invest a certain portion of the premium into market units, keeping the remaining portion aside for the base sum assured. It is important to keep an eye on the performance of the funds, for the returns could be negligible if there is a market crash. As such, the choice of insurance company is critical. ULIPs can be a smart option for the savvy investor who wishes to invest in a life insurance policy. Insurance companies have dedicated fund managers who oversee the investment.

Endowment Policies:

An endowment plan serves a dual purpose, offering not just life cover, but also doubling as a savings instrument to cater to any future needs. Under these plans, the policyholder is rest assured of an amount, even on maturity of the policy.

Individuals who are looking to protect themselves financially during the future can opt for such plans. These are ideal for people who might encounter expenses after a specified period of time. These plans attract a higher premium when compared to regular term plans.The premium is split into two major portions, with one of it going towards the basic sum assured and the other portion utilised as an investment tool to offer returns on maturity.

While it is possible to have unit linked endowment policies, most insurers in India offer non-linked endowment plans.

Whole Life Policies:

A whole life policy, as the name implies, offers protection for the entire lifetime of an individual. Certain insurers can have an upper age limit for maturity of policy. These can be in the form of insurance plus investment plans, wherein a death benefit is provided to the nominee on demise of the policyholder. If there is a maturity benefit associated with the plan, a maturity amount will be paid when the policyholder attains the upper age limit associated with the scheme.

While one might consider a whole life plan to be similar to a term plan, there are a few subtle differences. The premium for a whole life plan is typically higher, but these plans also offer a maturity benefit, which is not assured in case of a term plan.

Pension Plans:

Retiring from work can often be hard, given the fact that money might become a constraint. Retirement plans, also known as annuity/pension plans can be used by individuals looking to financially secure their retired life. These are mostly single premium policies, wherein a lump sum amount is paid to the insurer.

One can choose the frequency of payouts they wish to receive, with the insurer paying them an amount after they retire.This amount is paid throughout their lifetime, guaranteeing financial security even when one doesn’t work. Certain annuity plans are unit linked, offering market based returns to policyholders.

Money Back Plans:

Money back policies are a subset of endowment plans which provide a survival benefit to the policyholder. These take multiple contingencies into account. While a death benefit is payable on the demise on the policyholder, the survival benefit will be paid if he/she survives for a certain period of time.

Insurers pay a certain percentage of the sum assured at regular intervals, with this plan offering an additional source of income to policyholders. These plans are ideal for individuals who want a regular source of income, but are not keen to take risks associated with market instruments. The survival benefit is paid until maturity of the policy. These plans are known for the liquidity they offer, making them a popular option in the country.